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The ECB is Likely to Cut Rates in Response Poor Eurozone Economy

The ECB Is Likely To Cut Rates In Response To Poor Economy

The ECB (European Central Bank) has been informing markets to prepare for monetary easing. And although the Euro fell against the USD following this announcement by the ECB, there are other factors to consider.

Stimulating The Euro Zone Economy

The ECB has plans to maintain the interest rates at the current level, or further lower them at the start of 2020. This move matches some of the earlier statements by ECB officials who pointed out that a rate cut may be on the way.

The acting president of ECB, Mario Draghi mentioned in a press conference that the Euro Zone requires a huge amount of cash flowing into it in order to maintain the current growth rate and to stabilize the economy. The ECB has also been preparing new plans to stabilize the Eurozone economy. They have several options on their hands, one of which is a tiered system to support reserve remuneration (to avoid the consequences of a negative or lower interest rate).

Quantitative Easing

Quantitative easing is a method designed to help countries and governments around the world with monetary lending, and it has proven to be very effective against inflation.

The ECB is now taking measures of quantitative easing. They are buying bonds and other large-scale assets from Eurozone countries to help them with lending and to prevent further inflation. The ECB is also cutting the fees they take from banks that park/store their cash at the ECB. One ECB official said that they may be releasing a new quantitative easing program in the upcoming months.

Statements About The Stimulus Package

The president of the ECB also mentioned in a press conference that a big monetary stimulus is necessary to keep the economy growing constantly and to prevent it from going into a recession. This will be vital to improving the financial condition of the Eurozone economy.

Since a monetary stimulus is necessary, the bank is considering various options to support the economy. After the announcement of a package, the Euro went down in value to 1.1103 against USD, which is the lowest rate in more than two years. Germany also saw a temporary downturn when its bond yields dropped down to 0.167%, the lowest in three decades.

This downtime, however, was temporary and short-lived, as both the Euro and German bonds recovered after the president of the ECB mentioned that the Stimulus Package project did not have a lot o support.

Partial Agreement On The Package

All of the core members of the ECB have agreed that a package is necessary to stimulate the economy. However, members have disagreed on a number of smaller aspects of it.

Mixed Statements

While the possibility of a package was discussed, the president of the ECB told reporters that the chances of economic recession are very low, especially in the Euro zone. Because this statement countered the earlier statements by the bank, the Euro rose even higher against the USD to $1.1153.

From all the speeches and statements made by Eurozone leaders, it seems clear that the ECB is planning to introduce a package and cut the interest rates to support the Eurozone economy and to help it recover. These statements are intended to prepare investors and businesses for possible interest rate cuts and other measures.

Economic Situation Of Germany

Germany is currently suffering from a lack of orders, mainly because China’s demand in the automotive industry has reduced considerably. The PMI in Germany has dropped down to 43.1 from 45 in the months of June and July.

After the debt crisis in 2011, the ECB and other central banks had made policies to cut the interest rates and buy bonds from the Eurozone countries to help their lending and support their economy in the process. Although banks tried to go back to their normal routine a year ago, hard economic conditions worldwide prohibited them from doing so.